This is our second of three posts on the Ontario Court of Appeal’s recent decision in DBDC Spadina Ltd. v. Walton 2018 ONCA 60 arising out of a complex fraud scheme perpetrated by Norma and Ronauld Walton. This post discusses the finding by the Court of Appeal that it was inappropriate for the application judge to have granted a constructive trust as a remedy for breach of fiduciary duty. The Court of Appeal set aside the constructive trust because a fiduciary’s wrongful acts must give rise to an identifiable asset (there was no such asset), and it was inequitable to “leapfrog” one class of victims over other victims of the fraud in the circumstances of the case.
Both the appellants and the respondents in this appeal were victims of the Waltons who had convinced numerous people to invest in commercial real estate properties. The Waltons then moved the invested funds through various shell corporations to further their personal interests.
At the root of the appeal was a fight between the victims of the fraud over the priority of their claims against the proceeds from the sale of properties that were acquired as part of the scheme. The appellants, known as the “DBDC Applicants” were controlled by Dr. Bernstein, who had invested approximately $111 million with the Walton’s “Schedule B Companies.” The respondent, the Christine DeJong Medicine Professional Corporation (“DeJong”), invested approximately $4 million in the Walton’s “Schedule C Companies” which had acquired certain properties.
The application judge granted constructive trusts in favour of DeJong over four Schedule C Companies for a total of $2,176,045.57. The properties owned by these companies had been sold and the proceeds would provide DeJong with recovery of approximately 50%. However, DeJong’s recovery would be significantly less if calculated pro rata with the $111 million claim of Dr. Bernstein. The granting of a constructive trust over the four Schedule C Companies meant that DeJong would be satisfied first.
Constructive Trust Analysis
A constructive trust is an equitable remedy imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding a legal property right which they should not possess due to unjust enrichment, oppressive conduct or due to a breach of fiduciary duty. A constructive trust is a broad and flexible equitable tool used to determine beneficial entitlement to property.
The application judge did not grant a constructive trust over the properties owned by the Schedule C Companies on the basis of unjust enrichment, because there was no unjust enrichment since DeJong’s monies had been used, in part, for the purpose that they were intended (i.e. buying the properties owned by the Schedule C Companies). Instead the application judge granted a constructive trust as a remedy for breach of fiduciary duty.
In granting the remedy, the application judge relied on the Supreme Court’s guidance in Soulos v. Korkontzilas, 1997 CanLII 346 (SCC), that a constructive trust may also be imposed “to hold persons in different situations to high standards of trust and probity and prevent them from retaining property which in ‘good conscience’ they should not be permitted to retain”.
In setting aside the constructive trust, the Court of Appeal found that the application judge had failed to apply Indalex Ltd., Re, 2013 SCC 6, in which the Supreme Court modified Soulos by deciding that imposing a constructive trust for a breach of fiduciary duty is only appropriate if the wrongdoer’s acts resulted in an identifiable asset which it would be unjust for the wrongdoer (or sometimes a third party) to retain.
While part of the DeJong investments were wrongfully diverted by Ms. Walton, significant portions of the investments were used for the purposes for which they were intended as they were used to buy the properties owned by the Schedule C Companies. Applying Indalex, the Court said:
“In short, the wrongdoing vis-à-vis DeJong did not give rise to the acquisition of those assets, although overall there may have been “a connection” between them and “the process” through which the wrongdoing took place.”
The Court of Appeal determined this to be fatal to the imposition of a constructive trust.
In addition, the Court noted that there were other remedies available to DeJong who did not advance funds directly for the properties acquired but to the Schedule C Companies as equity investments or as shareholder loans. Granting the constructive trust would improperly allow DeJong to “leapfrog” over the other creditors by allowing its unsecured shareholder loans and equity investments to be recognized as a proprietary interest in the properties acquired by the Schedule C Companies.
- The availability of other remedies and the adverse impact of imposing a proprietary remedy on other creditors and parties must be taken into account in determining whether to impose a constructive trust.
- A constructive trust as a remedy for a breach of fiduciary duty is:
- appropriate where the wrongdoer’s breach give rise to an identifiable asset; and
- not appropriate where the wrongdoer’s breach did not lead to the loss of an identifiable asset.